In the throes of the subprime crisis, mortgage lenders aren’t eager to hear more bad news. But that’s what has been announced by six heavy-hitting nonprofit groups that advocate for low-income communities.
In a report released March 8, “Paying More for the American Dream: A Multi-State Analysis of Higher-Cost Home Purchase Lending,” the groups, including the Massachusetts Affordable Housing Alliance – which recently co-filed a bill in the state Legislature that would make major changes in Massachusetts lending practices – say that newly available data proves that minorities throughout the United States are getting more than their share of higher-cost, often subprime, loans from the country’s largest lenders.
Lenders – including Countrywide, Wells Fargo and Citigroup (now Citi) – have varying responses to that claim. They point to efforts they’ve made to expand credit to underserved borrowers and cite missing data that – according to Countrywide – make it impossible to determine whether racial discrimination has occurred.
Seven lenders and their corporate subsidiaries were targeted because they made a substantial number of both prime and subprime mortgage loans nationwide in 2005, the most recent year for which data is available – and the first year that mortgage-pricing data has been fully available, the report authors said.
The other lenders included in the report were Washington Mutual Bank, GMAC, JP Morgan Chase, and HSBC (The Hongkong and Shanghai Banking Corp.).
The report cosponsors, along with MAHA, were the New York City-based Neighborhood Economic Development Advocacy Project; the Empire Justice Center in Albany, N.Y., which serves New York state; the Woodstock Institute in Chicago; the Community Reinvestment Association of North Carolina; and the California Reinvestment Coalition.
Their report, which they presented to the Federal Reserve Board of Governors’ Consumer Advisory Council on March 8, relies on data newly available through the Home Mortgage Disclosure Loan Act.
The 1975 law requires all but the smallest metropolitan-area mortgage lenders to submit information to federal bank regulators, including the Federal Reserve, about decisions on loan applications and the income, sex, and race or ethnicity of the applicant. It was amended in 2004 to require that pricing information on all primary mortgages for owner-occupied, single-family homes issued at an annual percentage rate, or APR, of 3 or more percentage points higher than that of a U.S. Treasury bond with the same maturity, be included. The calculation includes points and fees incorporated in the loan.
Those loans are called “high-cost loans” in the study, which captures the majority of subprime loans issued, said co-author Jim Campen, a MAHA board member, chairman of the board of the Fair Housing Center of Greater Boston and professor of economics, emeritus, at the University of Massachusetts at Boston.
2005 provided the first complete set of data, the groups said. They believe it proves their point beyond a doubt.
“This study confirms that large disparities remain in the pricing of home-purchase loans,” said MAHA Executive Director Thomas Callahan.
For example, MAHA said, in the six metropolitan areas studied – Boston, New York City, Chicago, Los Angeles, Charlotte, N.C., and Rochester, N.Y. – black borrowers were nearly four times as likely to receive a higher-cost home-purchase loan than white borrowers, and Latino borrowers only slightly less susceptible.
In the Boston metro area, of 59,456 loans the seven major lenders made to all borrowers in 2005, 18.3 percent overall were high-cost, the data showed. The smallest number of total loans (3,374) and the highest percentage of high-cost loans (54.6 percent) went to black borrowers. Latino borrowers took out 4,681 loans, of which 54.5 percent were high-cost.
The most Boston metro-area loans – 42,114 – were made to white borrowers, with just 12.5 percent being high-cost. The metro area includes Essex, Middlesex, Norfolk, Plymouth and Suffolk counties.
In the six cities combined, 25.4 percent of 448,133 loans made in 2005 were high-cost. About half were issued to white borrowers; 13.6 percent of those were high-cost.
Black borrowers, by contrast, got 52.2 percent of the high-cost loans, as a percent of the 42,853 loans issued to them in the combined cities. Of the 80,039 loans issued to Latino borrowers, 48.7 percent were high-cost.
Campen said he would have been surprised if the data had not shown stark disparities.
“There’s such massive discrimination in other major industries, like housing and health care, it would be astounding not to see it in the mortgage industry too,” he said.
‘Downstream Referred’
The end result of the disparities is severe – not only to individual minority borrowers, but the neighborhoods where many of them live, he and others said.
“There used to be some neighborhoods you couldn’t get a loan. Now they’re overrun by high-cost lenders,” said NEDAP Executive Director Sarah Ludwig. In those neighborhoods, she said, “foreclosure rates are unprecedented [and] now there are bailout scams, refinancing scams, property-flipping Â… layers of predatory practices.”
Ludwig said she doesn’t think the report accuses individual lender employees of being racist. Rather, she said, the problem is “institutional” – and pervasive.
But Luke Peterson, a Wells Fargo loan office manager who runs the nationwide lender’s 2-year-old Newbury Street office in Boston, said his personal experience doesn’t jibe with the results.
“What all of our managers say is they want us to win the deal, get the deal, and if we provide bad financing to somebody, we are not going to win the deal,” he said. “Maybe all the lenders are offering minorities a worse deal because on the whole, they have worse credit.”
Peterson suggested that if someone is offered a “bad deal” on a loan, they should look elsewhere.
Study sponsors counter that oftentimes black and Latino borrowers are less sophisticated about credit, or simply go to the loan “channels” that are near where they live or work, or that they see advertised – which, they said, tend to be the subprime channels.
“I think one of the problems now is that you walk into a subprime affiliate [of a lender that also does prime-rate lending] and they wouldn’t refer you, you might not know that you qualify for a prime loan,” MAHA’s Callahan said.
Subprime-only lenders such as Ameriquest and East-West Mortgage, an affiliate of Commerce Bank in Worcester, also advertise on mainstream media outlets in prime time, Callahan noted – and some would-be borrowers might not be aware of other opportunities.
He said that, for example, if a person with good credit approaches Long Beach Mortgage Co. – which was found to be Washington Mutual’s main lender to black and Latino borrowers in the six cities studied – they should get the opportunity for a prime loan if they qualify.
“If someone with bad credit walks into Washington Mutual, they get ‘downstream referred’ to Long Beach,” Callahan said. “‘Upstream referrals’ should happen, too.”
Still, Peterson said, “If somebody is getting a bad deal, they should go to the next person. If everybody is offering a bad deal, then they deserve a bad deal.”
Peterson estimated that he meets less than 5 percent of customers to whom he offers a loan, since so many loans are done over the phone or online these days to enhance customer convenience.
A Citi representative released a general statement saying the financial conglomerate’s mortgage affiliates don’t discriminate, but adding that the company maintains “ongoing constructive dialogue with numerous community groups, as we continue to explore ways to make fairly priced credit increasingly available.”
A press release the spokesman provided noted that in 2005, the Citigroup Foundation also gave a $750,000 grant to NeighborWorks America, which planned to use it to train homebuyer-education counselors who would help low- and moderate-income families become homeowners.
Countrywide First Vice President for Corporate Communications Rick Simon said the coalition’s analysis of the available data “may be correct, as far as that data goes. However, both the mortgage industry and the Federal Reserve itself have repeatedly demonstrated that this data is incomplete.”
The data does not include many of the risk factors lenders use to evaluate and price loans, he pointed out. For example, borrower credit history, borrower debt-to-income ratio and loan-to-value ratios are not included in the data that lenders have to submit.
Simon cited a “frequently asked questions on HMDA data” report released by the Federal Reserve Board last April, in which the board wrote that these factors are excluded from HMDA data, which are “relevant determinants of price.”
The board added, “Therefore, price disparities by race, ethnicity or sex disclosed in HMDA data will not alone prove unlawful discrimination.”
“It is the belief of the mortgage industry and Countrywide, with regard to its specific HMDA report, that discrepancies in pricing are largely explained when these and other determinants are factored into the analysis,” Simon said.
Campen said community groups would like to see additional information included in HMDA data. “Paying More for the American Dream” includes that suggestion among its recommendations, he pointed out.
In 2005, he said, then New York Attorney General and current Gov. Eliot Spitzer requested more detailed information from lenders in order to investigate whether or not discrimination was taking place. “In the case of Countrywide, he was able to get this information, and found that there was discrimination,” Campen noted.
American Banker reported on Countrywide’s settlement with Spitzer on Dec. 6, Campen said.
Ludwig said she hopes “Paying More for the American Dream” will “raise awareness about what’s happening in the market, and influence policymakers and legislators.”
Campen said he thinks it’s one of many current efforts to reform mortgage lending practices that is working.
Another that he hopes will have a big impact is expanding the reach of the Community Reinvestment Act, one proposal contained in MAHA’s bill.
